September 25, 2025 • 43 mins
There’s opportunity in collateralized loan obligations, according to BlackRock, the world’s largest money manager. “CLO tranches are probably one of the best relative value picks within the credit markets,” James Turner, the firm’s co-head of European fundamental fixed income investment, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Tim Riminton in the latest Credit Edge podcast. “You are getting a very good spread and deal pickup there,” he adds. They also discuss opportunities in the auto, health care and defense sectors, how to play chemicals industry debt and the outlook for buyouts, defaults and recoveries in leveraged finance.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:18):
Hello, and welcome to The Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg,
and I'm Tim Rimington, a senior credit analyst covering basic
materials here at Bloomberg Intelligence. This week, we're very pleased
to welcome James Turner, who is co head of the
European Fundamental fixed income business at Blackrock. James, great to
have you with us.
Speaker 2 (00:37):
How are you very good? Thanks and that great deity.
Speaker 3 (00:40):
James has been with Blackrock for over seven years now,
starting out as the head of European Leverage Finance and
Portfolio Management, where he oversaw high yield long short credit
loans and clos all of which we hope to get
some insight into into today's discussion. Prior to black Rock,
James spent almost seventeen years at oak Tree, where he
was portfolio manager for European and Global high yield as
(01:02):
well as European loan and COLO strategies. I always like
it when our guests share my interest in high yield,
but James's background does one better as he also has
a degree in chemical engineering. But maybe we should leave
the discussion of the changing economics of industrial industrial molecular
chemistry until after we've finished taping.
Speaker 1 (01:20):
Indeed we will so just to get us started. Credit
markets are hot, with bond spreads at the titles in
twenty seven years, as demands soores and net new supply
remains thin. Elevated US political and macro risk has pushed
global credit investors into other regions, especially Europe, to diversify
their portfolios, but that brings its own challenges also political.
Just look at all the volatility recently in the UK,
(01:42):
Brands and Holland, plus there's the trade war to contend with,
and countries across the region are having to significantly boost
their spending on defense. At the same time, globally in
credit markets we are seeing more distress, defaults and bankruptcy,
but you wouldn't know it looking at the price. So
James break it down for us, how do you position
yourself given all the volatility, rising macro risk, turbulent geopolitics,
(02:05):
but also very tight credit spreads.
Speaker 2 (02:07):
Well, I think and all of those things you say
are completely right obviously, and it's a market where I
think what we need to look at is that's where
we sometimes take a step back and we need to
look through some of the noise, not be whips ORed
around by every headline that we see, because actually, ultimately
we're investing in fundamental credit and we're looking at the
companies on a corporate basis like that. But the market,
(02:29):
as you say, has also taken a very willingness to
look through the noise. At the moment, the insatial demand
for income has just kept technical is extremely strong from
that point of view, and having said that, there are
some signs or a little bit of stress in the market,
and certainly from the point of view of we want
(02:49):
to be able to be nimble really and when the
spreads go a little bit tighter, we might reduce risk
a little bit and then wait for the opportunity in
the spreads widen out a little bit. It's really taking
advantage of those dips still really very much by the
mentality in quality credit and making sure that we're looking
at the opportunities every time that happens, but not being
(03:12):
too scared to act when it happens, but not also
being too risk on the moment. Because as you say,
there is some stress in the market.
Speaker 3 (03:22):
So what are your dislikes and likes at the moment?
You know, when we're looking at sectors, asset classes, country exposure.
Speaker 2 (03:30):
Well, I think it's quite there's no sector that we
actually dismiss. I think there's always opportunities within every sector,
but there certainly sectors that are facing more challenges at
the moment. And you might say, you know, auto's I
think is one that's well trodden over as facing some stress,
and that's been facing some difficulties for a while because
of the transition from VICE to EV and that's only
(03:52):
made worse by some of the tariff announcements and also
some extent the import's coming in in the EUV market
as well, especially into Europe. Having said that, you know,
the majority of autos and auto suppliers are likely not
to default over time, so actually it does create opportunities,
but that it is obviously a sector that also has
its higher than are higher than fair share of defaults
(04:12):
and credit stress in it. So it's a matter of
really careful credit selection there. And really what we look for,
I suppose is companies that have almost the more premium
the better in many ways, because one of the things
we've noticed, especially with terrasts, are the more premium you are,
the better you are able to pass through your price increases,
and there's no you know, we can see that the
(04:32):
luxury car companies are better at doing that than say,
more commoditized car companies, all those competing in a very
evy heavy market. The other sector, and one you know,
but perhaps closer both of our hearts from history is chemicals,
which I think is actually a very challenged sector in Europe.
And I think that that's it's almost unique to Europe
(04:53):
a little bit how challenged it is because of the
feedstock costs that Europe experiences in terms of its reliance
on nap there is a raw material for its petrochemicals,
but also even just the gas prices being so high,
you know, three times the price of gas in the US,
and just from a feed stock perspective, that makes it
a very difficult market to be competitive in. So you
(05:15):
really have to be very high on the cost curve
to be internationally competitive. And that's combining a point as well,
where you're seeing increased supply across the world generally at
a time when demand is quite sluggage, so as that
there's operating rates for it becomes quite hard to make
good margins. At the other side, I think the other
sector that's perhaps almost a stealth sector, or perhaps almost
(05:39):
sometimes the most dangerous sector as well. It has some
opportunities that it's healthcare and often sort of a safe
or regarded as a safe sector, but actually it's almost
masquerading as a safe sector because actually sometimes when you
look deeper into it, some of the challenges from the
regulatory point of view, from a pricing point of view,
and the cost past three point of view are actually
really quite challenging for that sector. So again you have
(06:00):
be very careful in that segment as well, not that
there's not opportunities there, but it's just a sexor that
you need to be really quite careful.
Speaker 3 (06:08):
So keeping the focus on chemicals for a second, you know,
whereabouts in the credit spectrum do you see the most
sort of bang for your buck, you know, managing that
risk while still getting exposure to what may one day
be a potential recovery.
Speaker 2 (06:29):
I think what you look for is a position that
you have whereas cost advantage, where you're the lowest cost producer.
And it sounds obvious, but actually you need to look
into all the plants and understand exactly where they are
on the cost curve, and then maybe also the level
of specialty within the chemical company themselves. Clearly, the more
specialized you are, the less competition you potentially have and
(06:50):
the more bespoke your products are to enable you to
pass through increase price cost cost increases when and make
sure you get you keep your margins, and also you
are operating rates also potentially those companies with long term
contracts as well supply agreements that make sure that they
always are reducing at high operating rates because it is
(07:10):
really quiet and economies of scale business.
Speaker 3 (07:12):
As well, you and far between. Then, one of the
things we've heard from chemical CEOs this year is about
the fiscal simnius in Europe coming down the pipeline in
twenty twenty six. We've had ANXIS BSF others talking about
how that may bring a boost to chemicals demand and
(07:34):
also generally European industrials which have been sort of beaten
up a bit over the last years since the Russian
invasion of Ukraine. What are your thoughts on that we
haven't really seen any impact so far. Are you hopeful
that we'll see a change in twenty twenty six.
Speaker 2 (07:53):
I think we are, and that's our base case that
at some point in twenty six we will see demand
pick up across the industrial segments based on this infrastructure
spend and the boost from Germany, but it is going
to take a little bit of time to come through,
and I think in that intermediate time we're going to
see some companies struggle through that period. So again get
(08:15):
to your tour point, what do we look for in
a company as well? Is that every time really you
look at a chemical company, especially more quality cyclical type company,
you have to be sure that it can see through
a cycle, and so you need to look for the
appropriate leverage levels. You need to look to make sure
the cash flow is sufficient to get through a cycle
and its ability to potentially delay capex and enter that
(08:37):
point well invested, so it doesn't end up with operational
difficulties through that period.
Speaker 3 (08:45):
And more broadly, on the theme of the industrial recession
in Europe, do you think that the physical stimulus will
be enough to sort of to end it, to end
this sort of elongated recession we've seen in European and
or are the pressures facing it in do we actually
need more policy support to keep industry in Europe?
Speaker 2 (09:10):
Well, I think we're very hopeful that it will stimulate
the industry from that point of view, and I think
there's good reasons to think it will, and there are
other things that also need to be Infrastructure does need
to be improved generally in Europe. There's a lot of
investors lined up to make sure that that is the case.
So I think we're hopeful that that will happen. And actually,
(09:31):
I think when we look at estimates, we potentially think
that even people are a little bit conservative about how
much that that stimulus will actually improve the economies, particularly
in Germany. And then potentially, you know, if we're hopeful
as well, we may at some point see rebuilding in
Ukraine which might help as well. And we're hopeful that
that will help towards the latter half of twenty six.
(09:54):
But as I said, I think it's going to feel
like a long time until it actually starts feeding into
the industrial economy.
Speaker 1 (10:01):
I'd like to go back, jameson what you said at
the top of the call about being careful about your
credit selection, you know, not too risk on buying the
dips in quality credit and again being nimble. That's that's
what a lot of our guests would say. But at
the same time, you know, that's fairly easy for me
to say if I'm a smaller fund, you know, managing
a couple of one hundred million maybe, but a huge,
(10:22):
you know, elephant in the room, multi trillion dollar asset
manager like black Rock, how do you manage that? I mean,
how do you execute on that? But given you know
you're looking, you're being selected, but you have a lot
of money to put to work.
Speaker 2 (10:35):
Well, we have i would say market leading access from
a point of view in terms of number of traders
that we have, the access that we have to banks
with a very large counterparty of many of the institutions,
and we make sure that we get wall crossed on
a lot of deals as well, so that we have
(10:56):
access to think about the deals in advance, especially in
the primary market. And then also we have diversity across
our portfolios. We have some portfolios that maybe are a
little bit more buy and hold type portfolios, then we
have some more active portfolios, so we have a range
of portfolios. And also the other thing is that comes
down to it is actually at the moment, with the
(11:16):
technicals that we see in the market, it comes down
to again being good at that credit selection. Because if
you're early to spot problems or your early to spot
to advantages. Then actually usually the liquidity is there actually
for you. It's really when a situation becomes very stressed
that you find that the liquidity to drives up. So
actually it's a key skill being early to the party,
(11:36):
and that's why we invest a lot in credit research
as well.
Speaker 1 (11:40):
Do you see any signs, though more broadly, of miss
priced risk? Are there bubbles developing given the very very
strong technicals. I mean, there is so much more demand
than net new supply of the debt.
Speaker 2 (11:51):
That's true, and I think this comes from less insatiable
demand for income at the moment. If you look at
where you know that there is some stress in the
higher market, of some stress in the loan market. But
having said that, if you look across the piece and
you consider quite how fast interest rates rose, actually companies
(12:14):
did quite well through it. They're in a relatively good position.
The fact that the refinancing market, the tech market is
open and the technicals are so strong is to some
extent self reinforcing as well, because actually companies can refinance
it reasonable rates. Actually, to some extent, coupons are now
starting to at least decline in Europe now, so actually
(12:34):
refinancing is becoming easier for some companies as well, and
that helps their cash flow. So it is so actually
when we look at the spreads at the moment, we're
looking at them and we're thinking they are at the
tighter end. But having said that, there are good reasons
for them to be at the tighter end as well.
(12:56):
And well, and the other thing is when we look
at spreads as well, and with this as a well
trodden argument, but people are also looking at the yields
and it's a long time since we've seen yields as
good as this in the market in the past, and
it's pushing people, I think as well. The corporate credit
is looking extremely attractive compared to sometimes the sovereign credit
(13:20):
because actually you have a choice where you can find
your yield. You either go potentially for duration in the
longer dated sovereigns, or you take a little bit of
a shorter and the bellue of the curve for some
of the corporate credit. And the decision at the moment
seems to be go for the corporate credit for good reason,
because companies are in a good state and it's not
really the volatility isn't really coming from the corporate volatility
(13:41):
is often coming from the sovereigns, and so that's actually
why I think we're also seeing this strong demand. Then
there's other areas in our portfolios, and what we might
consider the ideal portfolio at the moment in fixed income
is in many ways we have a core allocation to
invest great corporate credit, but then we're also looking at
(14:02):
the plus sectors to supplement some of that yield and
some of that income as well. We may have a
portion in high yield, we may have a portion in
emerging market debt. And particularly something that's particularly good value
at the moment we feel is COLO tranches, And you
can really choose and pick your risk spectrum when you're
looking at COLO transers. You can go into triple A
(14:22):
and you're being well rewarded there, or if you've got
a little bit more risk tolerance, you can go down
into the double B or even potentially single B tranches
of clos and really you're getting a very good spread
and you'll pick up there. And that can you construct
a portfolio from that point of view in a risk
controlled way. It can be to whatever the clients or
underlying investors risk tolerance. Is it really produces a very good,
(14:49):
diverse portfolio where you're getting a nice yield and reasonable spreads.
Speaker 3 (14:55):
Just going back to the comment you're making about credit
markets being in a pretty good position, I just wanted
to get your thoughts on where you think default rates
are heading and your comments there about being nimble, you know,
do you see more of the stress situations as opportunities?
Are you able to get in ahead of enemies, you know,
(15:15):
join creditor groups.
Speaker 2 (15:18):
So I think we've seen slightly elevated default rates in
European high yield for example, recently, but having said that,
we've also seen extremely high recovery. So actually, when you
look at the loss rate, it's potentially not as high
as you might imagine. So the recovery rate, for example,
on the European high yield market has been around seventy
(15:40):
percent this year. Traditionally people modeling around a forty percent
recovery for the European high yield market. So despite the
fact the default rates have gone up, the loss rates
haven't actually increased as much as you might imagine. I
think we've seen a number And the other other thing
is what counts as a default is sometimes not even
(16:01):
a situation where you're actually ending up losing capital either,
which I think is also why the default rates have
been quite high. So if you had potentially just an extension,
it would still count as a default for the statistics,
but actually it doesn't if you don't really ever lose
any capital from that point of view, So to some extent,
I think the default rates are they're higher, but the
(16:22):
loss rate is not as high I think going forward,
and most of the defaults have worked their way through
the system, I think from here we'll see a decline
in the default rate in Europe. And the other thing
about it though, is also is that we've seen the
(16:43):
default rate rise a little bit, but we've also seen
that the spreads are already reflecting that in the names
that are likely to fault or unknown defaults in the future.
So actually the capital loss the defaults recognizing has already
been taken in the market. But it's also why we
see so much at the moment as well in the
spread of the market. So when you look at the
(17:04):
triple C segment, it actually is over a thousand spread
at the moment. It's extremely high, and that's really some
of the names that we know are going to fault
over the next few months already reflecting that in the price.
So a lot of any of the expectations we've already
seen in returns. But for the majority of companies as well,
(17:25):
you know, the market is wide open. There's no refinancing
risk on a company that is that is performing at
the moment. And that's again I think where the market
has changed a little bit over the last six months
is that in terms of how people are acting, no
one really has so much tolerance for companies that are
getting into a stress situation. So what you see is
(17:48):
you see people really coalescing around the middle, the high
single BEE categories, the low double B. There's a lot
of demand for that, not so much demand for triple
C at the moment, because as we know, we're in
a little bit of a trickier time at the moment,
and no one really wants to have to buy a
company which needs to grow into its balance sheet because
(18:10):
the growth is not sure that it's there.
Speaker 3 (18:14):
On the recovery's point, I mean, seventy versus forty percent,
that's a really big difference. What's driving that.
Speaker 2 (18:23):
I think it's because a lot of the defaults have
been situations where there's a secured element of the capital
structure and there's an unsecured element of the capital structure.
The secured element is much larger in comparison to the
unsecured in most cases, and the secured element is actually
recovered very well through potentially an lemy or a distressed exchange.
(18:45):
The subordinator is not recovered quite so well, but it's
a much smaller percentage of the capital structure. So actually,
if you looked at the dispersion, I think it would
actually be quite high, and there'd be a big, a
big divergence between if you're a secured creditor very high recovery,
unsecured credits are actually probably a very low recovery. But
(19:05):
that's really the market we're in at the moment. But
it's a positive development as well for how your market
because if you look back in history, secured bonds were
a relatively new thing after the Financial crisis. That were
very few before the financial crisis. So when you look
at the recovery rate now, it's gradually, I think been
increasing a little bit as you see more secured bonds
(19:25):
in the higher your market.
Speaker 1 (19:27):
Sounds like you're also avoiding triple cs, which you know
they have performed well. Spreads have remained slightly wide to
the rest of the market, indicating the risk, but they've
done you know, so by avoiding them, you're you're going
to sacrifice return potentially. Do you worry about underperforming if
you if you miss out on triple c's.
Speaker 2 (19:45):
I don't think it's a question that actually it's not
a really a question of necessarily just avoiding them. Were
still selectively by them. But I think actually the bar
is a little bit higher at the moment. In the past,
when you could see obvious growth and you could see
easy cash flow generation and very low financing rates, it
was easier to understand that a business could grow into
(20:08):
its capital structure a little bit more, which is typically
what many triple seeds need to do. And I think
the bar is just now a little bit higher to
do that. But selectively we do so are quite see opportunities,
and we certainly do buy triple seeds.
Speaker 3 (20:23):
And on the point is, you know we've seen quite
a few in recent years. Do you think this trend
is going to continue? I mean, market environment relatively benign.
Is this the time that sponsors come and you know,
sort of kick the can down the road a bit more.
Speaker 2 (20:39):
Yeah, and kicking the can down the road has a
negative connotation in some ways, but actually for cycical businesses
that can work quite well sometimes, and there's clearly a
temptation to do it if you can see an opportunity
to create value sometimes. I think the difficulty I mean,
I think we'll see more of them in Europe. Having
(21:00):
said that, it's harder to execute an lemy in Europe,
and there are some more obstacles to it in Europe
than there are in the US. So I'm sure where
the US has gone to some extent, Europe will follow,
but I don't think in quite the same volume, because
there are jurisdictional issues and even the legal framework is
a little bit harder to navigate anywhere in Europe from
that point of view.
Speaker 1 (21:21):
And how do you protect yourself against the threat of
being subordinated. I mean, you're obviously the biggest and one
of the biggest funds out there, so is that just
just a scale issue.
Speaker 2 (21:33):
I mean, when we get into a restructuring, we'll obviously
want to take an active part in it if we
have reasonable position and clearly act in our best interest
from that point of view. But I think the biggest
way to protect really against it is making those good
credit calls in the first place and not really getting
into a situation where you're going likely to be entering
into a LEM. I think one of the things that
(21:55):
we're also would be very wary of is entering into
an LEM as a secured creditor. Has been a very
difficult position to be in. I think if we were
in an LEM, or we're at risk of going to LM,
we're to be in the secure position.
Speaker 1 (22:12):
Can you talk a bit about the defense spend over
in Europe. We've heard people on the private side get
quite interested in the potential for investing there. You know,
it's obviously going to require a lot of spending by
governments and defense companies and everything else, But what's the
what's the credit investment angle for you?
Speaker 2 (22:33):
It's a sector that's clearly going to benefit from increased
spending across Europe. I think it's well, you know, well
well trodden route. Now, there are clearly some ESG requirements
that we have to meet on defense companies, and again
they're well known in terms of controversial weapons and certain
guidelines that we receive from investors, but also it's away
(22:57):
from just the defense as well. I think it's trying
to take advantage of all of the infrastructure spend that
we talked about as well, so that there are many
industries I think going to benefit from that. We just
have to make sure that we time it right and
we look at it carefully, and we look at those
that would really likely to benefit for example. I mean,
again it's a very big sector and there are some
(23:18):
going to be some winners and losers. But within the
utilities sector, for example, I think everything to do with
the AI build up is going to require more infrastructure
spend from that point of view, you know, as simple
as things. Looking at companies that produce copper cables for example,
are likely to be beneficiaries of that. So we're looking
for the maybe the second order companies as well that
(23:41):
are going to benefit from some of that infrastructure spend
and some of that defense spend.
Speaker 3 (23:46):
You mentioned ESG there being a concern when it comes
to defense. Do you find en investors are getting a
bit more lenient on defense as part of a sort
of an ESG screen or blacklist since the since the
Russian invasion of Ukraine.
Speaker 2 (24:03):
Well, I think there are some things that always going
to be hard lines. But having said that, you have
to also weigh up the country's ability to defend itself.
And perhaps there has been some softening of amongst some
constituents of the of the lines, but there's always going
to be some hard lines on the controversial weapons and
I think that those will continue to be There.
Speaker 1 (24:27):
Is the investment opportunity more on the public side, do
you think, or was it direct lending private? How do
you kind of break that down?
Speaker 2 (24:34):
I think it's all of the above. There's now I
suppose with the advent of direct lending, there's really now
a third option for particularly for things like LBOs as well.
But actually increasingly larger public companies are also looking in
even investment rate of looking for the direct lending market
every scene as well. The biggest beneficiary in many ways
is actually the LBO or the sponsor or the company,
(24:55):
because they actually have now a third reasonable and sizable
source of financing. And I think companies when they look
at their options will depending on the speed of execution
they need, or whether pricing is more important, or whether
such size or scale is more important, they'll look at
all the markets, and they'll probably weigh out their options.
If they're luckily enough to be able to take advantage
(25:17):
of all three of them, then I'm sure they will.
And we've seen different periods where direct lending has come
to the foe. Perhaps in twenty twenty two, when there
was the spreads were wider in the high yield and
loan markets and there was more certainty of execution by
going to the direct blending market, and then a spread
of titans. We've seen some of those deals then refinance
out into public markets again. I mean, arguably you could
(25:39):
say in twenty twenty two and this was a maybe
not an exceptional time, but it's not the norm. Is
that actually there probably was, Actually it was more expensive
to come to public markets at that time than it
was to come to the private markets at that time.
That's obviously since reverse somewhat as well. But I think
we see a lot of capital looking at you know,
(26:01):
not so many deals at the movement. So clearly there's
a lot of competition for those deals.
Speaker 1 (26:06):
What about the relative value though for you as an investor.
We talked to some private credit firms. I mean, our
last guest from Blacksone was talking about a two hundred
basis point pickup to liquid credit on both high yield
and investment grades. So you know, that's that's pretty substantial
given how tight everything else is. I mean, does it
not make sense to you to I mean, you have
a lot of potentially locked up capital, it's less volatile,
(26:29):
you get a lot more return. Why not why not
go private?
Speaker 2 (26:33):
I think when you look into it, and clearly Black
Book has the ability to, especially with the recent acquisition,
has the ability to go private and have private debt
capability or materially larger private debt capability now as well.
So we can look at all markets and I think
that that's really what we want to be able to do,
is we want to provide capital two companies wherever they
(26:56):
might want it, whether it's in the public markets or
the private markets. Again, but it's very nature. Seeing how
the two hundred basis points pick up is derived is
not necessarily clear just because of the nature of the
private markets, we don't see exactly exactly that pickup. But
I think also we need to distinguish a little bit
between the risk and where we sit on the risk
(27:18):
spectrum as well, because if you compare I don't think
comparing the European high old market to a lot of
sponsor direct lending deals is exactly comparable, only because when
you look at the high old market, it's seventy percent
double B. This is talking about the European HIGHERD markets.
It's seventy percent double B. I don't think, and obviously
they're not rated, but I don't think most of the
direct lending deals would fall into the double B category.
(27:41):
They're more akin probably to the leverage loan syndicated loan
market in the single BEE category, as like sponsor deals.
So again comparing you need to make sure you're comparing
apples with apples. But I think the one thing we
want to be able to do is provide capital wherever
it's needed and in whatever form it's needed. And I've
no doubt in the future these three markets will coexist
(28:04):
as they do at the moment quite comfortably.
Speaker 3 (28:08):
So you know, we've got this relatively benign and market environment,
and companies have new ways of financing themselves, you know,
often with the well spreads have come done quite a
bit this year. Do you see this, you know, as
the makings of a new wave of M and A
or LBOs coming to Europe and when do you think
we could see a pickup on that side.
Speaker 2 (28:32):
Well, we hope, we hope to see a pick up
by now already, I think, but it's been a little
bit delayed, and I suspect it's going to be a
little bit delayed a little bit longer because really, when
I think when we talk to banks about their pipeline,
we talk about, particularly the M and A pipeline, I
think most deals take around, you know, at least minimum
(28:52):
three months, but more likely six months to materialize, and
I think we're still going to be seeing that the
pipeline is a little bit bear for the rest of
the year, which I think provide a very supportive backdrop
or spreads. Still, I think we're still going to see
these strong technicals and the market's ability. We're going to
see volatility, no doubt in terms of the headline news,
(29:13):
and we've just seen a little bit of about it
with the French elections, but the market seems to be
able to shrug it off quite easily, and I think
that will continue while this technical demands taste strong and
we don't have enough supply in the market, and I
don't think we can really, although we're seeing some I
think we are seeing some green shoots of recovery in
(29:34):
M and A, but I think that's mostly in the
corporate area as opposed to the LBO area. But I
also think that there are private equity companies that are
more keen now to make sure they are making some
exits because I think exits have been a difficult thing
and they need to return some capital to investors now.
So I think there is some pressure building from that
(29:54):
point of view, but I'm sure again they'll be doing
it at the right valuations when they when they when
they see fit. But I don't think the pipeline is
strong for the rest of the year, and so I
don't see you or see a huge pickup.
Speaker 1 (30:09):
Give the new deal given those strong technicals. How tight
could spreads go?
Speaker 2 (30:13):
James, Well, we're if you depending on metrics, at the moment,
we're really quite close to all time tights. It is
certainly post financial crisis. We're not actually especially like for like,
if you look credit rating adjusted, we're actually not at
the tights of the European market, at least compared to
(30:34):
two thousand and seven when it reached its tightest I'm
not saying we'll necessarily get there, but I think it
would be. I think where we are now is we're
effectively range bound. It doesn't mean we can't go a
little bit tighter from here, But then I don't see
us going, you know, much more than maybe ten or
twenty basis points tighter from here. I mean, that'd still be,
(30:57):
you know, a relatively material move in this market. And
then I suspect would see, you know, if we see
a wave of supplies we did in June, we'll see
the market going a little bit wider. Again, it's a
very strong market.
Speaker 1 (31:08):
At the moment, But is there a relative value Europe
versus US still? I mean, it sounds like it based
on some of the stuff you're saying, particularly on recoveries
which are much lower in the US.
Speaker 2 (31:20):
They're much lower in the US, but the default rate
is actually lower in the US at the moment as well.
So I think at the moment, we really see this
a game or a question of really just making the
right credit selection. I don't think there's a clear advantage
of one market over the other at the moment. I
think what we we see if you but having said that,
(31:43):
you were to look at the technicals, I think they
slightly favor at the moment the European markets. And there's
a reason why I say that is actually, although I
don't think we've seen anywhere near this whole scale reallocation
away from the US market that perhaps people we're talking
about in April or May, I think, on the margins,
we have seen people quite keen to diversify a little
(32:06):
bit and I think Europe has been a beneficiary of that,
and I think other markets, such as say emerging market
debt or something like that, has also been a beneficiary
of that as well, as people just look to diversify
risk a little bit away from the US. But again,
the majority of assets will still be in the US.
(32:26):
It's on the margin. And we've not only seen that,
I think from European investors going back to home, I guess,
but also I think we've seen it from investors who
are traditionally very US centric investors, say for example in
the Middle East or perhaps in Asia. They've also, on
the margin, have slightly reduced their exposure to the US
and that's really been to the benefit of Europe. And
(32:49):
when you've seen even a small allocation away from the US,
because the European markets are that much smaller. It actually
makes quite a lot of difference to the European market.
Speaker 1 (32:57):
That the spread's going further lower. And also, you know
there is easing going on around the world. You mentioned
earlier a nice yield when if you've got to put
a number on that, but also, I mean, how much
of that nice yield remains in those tightening and easing dynamics.
Speaker 2 (33:14):
People have been quite happy to have they've been sitting
in cash and cash reserves or cash accounts, and cash
deposits have really been quite high across Europe, and I
think what we're increasingly seeing is people looking at alternative
ways to get income, and I think that's going to
continue driving the markets. And nowhere is that more evident
(33:34):
than we've seen in things like fixed maturity products, where
people have been transferring from their cash deposits into either
investment grade corporate bonds or high year corporate bonds to
supplement that income. That has been reducing this interest rates.
(33:55):
So the answer is, I think yield from that point
of view, is still attractive to people because it's where
and it's still very attractive compared to history as well.
I mean, if you look over the last ten or
fifteen years, really we haven't seen these yields at all
during this period. So and I think memories, you know,
going back to when interest rates were much higher, you know,
(34:17):
many decades ago, have faded and actually people still regard
these yields as attractive and places they want to put
their cash. And also it goes I mean, just as
another I think that the FMP market is really also
helping in some ways to stabilize and you know, people
in regard it as a good thing or a bad thing,
(34:37):
but actually once the money goes into these F and
P funds that have maturities of say three or four years,
it's almost locked up, and it's providing to some extensibility
to both the investment rate and the high yield markets,
especially in these shorter data points. And again it was
very evident during April selloff, when we had Liberation Day,
(35:00):
that we saw that there was very very impact. There
were still buyers of all of these short dated bonds,
and we believe that a lot of that demand is
from fixed maturity products and we've seen that demand continue
and it provides a real stability and anchoring to that
short end of the market.
Speaker 1 (35:17):
Sorry, fixed maturity products the FMP you were talking about.
That's something you you have in Europe that we don't
have here. So I'm just wondering could you just expand
a little bit on what they are.
Speaker 2 (35:26):
Yeah, sure, it's they have a maturity data effectively, so
it's usually between three and four years, and so people
will transfer there into one of these funds and it
will have a yield headline yield that you get at
the beginning of when you invest in the money, and
then in three or four years that year should have
(35:48):
materialized and you can get your money back and you
will have got whether it's four or five six percent yield,
whatever your risk tolerance was when you went into there.
And these are very attractive products to much of the
retail market across Europe.
Speaker 1 (36:05):
And they are significantly active in the corporate debt market
to the extent that they're actually affecting risk pricing or
demand or how what's the bigger impact.
Speaker 2 (36:16):
I would say both. I mean anything that you can
you can often even see that where a bond has
a three and a half or four year maturity, as
soon as it falls into the range of the majority
of fmps, it's spread my attactically tighten. It's your go
down because the demand for the is so significant. I
(36:36):
mean there are billions, there is billions of euros that
has flowed into these products over the last six months.
Speaker 1 (36:43):
I want to ask you, James about ESG because you
brought it up earlier and it is something that is
on our mind. This week Climate Week in New York,
Black Rot was though among a group of money managers
to have lost credit mandates from one of Europe's largest
pension funds, and there was a, you know, an e
SG element to that. I know it's it's a quite
a controversial matter in the US and it's more embraced
(37:05):
in Europe. But what's your view generally on ESG investing
when it comes to credit.
Speaker 2 (37:12):
I think the thing about ESG is it's actually part
of our risk control anyway, It's always been part of
our process if you think about the elements that lead
to a good credit selection. And this is before this
is not specific ESG funds. This is just consideration of
(37:33):
the risk factors that affect a company. And if you
consider there that you know, the the environmental impact that
a company has in terms of it's if it gets
into issues, for example, it's pollution or something like that.
(37:55):
Then actually you always need to consider that because it's
part of the investment that a company needs to make
to make sure that it's actually complying with rules. So
I think from that point of view we've always looked
at it. You don't want companies to end up with
liabilities because they're obviously going to be credit negative, So
from that point of view, we've always looked at it.
(38:15):
I think in terms of social branding and how important
it is to make sure that you're best in class
from that point of view, in terms of how you
treat your employees or anything like that. Then actually, I
think we have always looked into that as well, because
it can again affect the value and the risk of
a company from that point of view. And again governance,
(38:36):
I mean goes without saying. You really want strong governance
within a company to make sure it's well run, well controlled.
One of the biggest reasons for loss, I would say
amongst companies over the history that I've been looking at
these credit markets is often because of poor governance, because
of irregularities that occur. So any company that has good
governance is obviously going to or not obviously, but is
(38:58):
usually a good credit its investment as well. So I
don't think it's a new thing that we've looked at
from that point of view. It's always something that goes
to the risk of a company, something that has always
been part of our credit process.
Speaker 1 (39:14):
So in terms of everything you're looking at right now, Jane,
what's the what's the big opportunity, where's the best relative
value let's say for the next six to twelve months
in your you know, in your view.
Speaker 2 (39:25):
So I think when you look at relative value, as
long as I think I mentioned them earlier, actually, I
think the probably COLO tranchers are probably one of the
best relative value picked within the credit markets at the moment.
And the beauty of them as well as that you
can pick your risk tolerance as well. You can go
from Triple A all the way down potentially to Colo
equity as well if you want, and you can get
(39:46):
the potential return that you want. And on almost every
chrance you look at in terms of it spread, it
looked well remunerated. So particularly you know, you look at
Triple A's you're coming at one twenty five, one thirty,
they look extremely attractive. From that point of view similarly
to the investment grade tranches as well, and if your
(40:08):
tolerance is higher than you know, equity in the low
to mid teams is also a pretty attractive investment as well.
And I think that much of the would i say,
sort of stigma of clos that perhaps existed post financial
crisises or less past now and we've seen that CLO
two point nor it is really a very good structure
(40:29):
and something where really the chance of credit loss, especially
in these higher rated transes, is very very low.
Speaker 1 (40:36):
But given all that we're discussing about the stresses in
the leverage finance market, you know there's there's loans. You
know that there aren't that many of them, there's a
lot of demand for them that the pricing just gets squeezed,
they get refinanced all the time that the arbitrage for
clos is being diminished. You're not worry generally about sort
of risk brewing technical risk in the clos given how
tight the market is for leverage loans.
Speaker 2 (41:00):
I mean, clearly there's a there's an element as well
which you need to pick the right managers because the
loans that get selected to be in the closlore on
the credit skill of those managers, and the managers that
avoid the problems and the more avoid the defaults will
I think will have very good performing clos and we're
very comfortable with that from that point of view. But clearly,
(41:22):
when we're buying clo trans is one of the things
that we are looking at is the style and quality
of the manager and their history of credit selections, their team,
all the things that you look at to make sure
that you're selecting managers where you think that their chances
of credit loss within their portfolios are minimal. And of
course there's you know that these clos are based on
(41:43):
really a very diverse portfolio, and you know it's one
of the criteria that clos are judged on is the
diversity of the underlying holders.
Speaker 1 (41:51):
And you're buying European clos from Triple aid all the
way down to the extity trund.
Speaker 2 (41:56):
Yes, yes, or we have the we have funds and
ability to do that.
Speaker 1 (42:01):
Would they also buy private credit helos.
Speaker 2 (42:05):
That's not something that fits within the mandates of those
But if we had a mandate that was able to
put these end then I'm sure we'd look at those
as well.
Speaker 1 (42:13):
Great stuff. James Turner from black Rock. It's been a
pleasure having you on the Credit Edge. Many thanks, no,
thank you very much. And to Tim Riminton with Bloomberg Intelligence,
thank you so much for joining us today.
Speaker 3 (42:23):
Thank you for having me James.
Speaker 1 (42:25):
Even more analysis read all of Tim's great work on
the Bloomberg Terminal. Bloomberg Intelligence as part of our Search
department with five hundred analysts and strategists working across all markets.
Coverage includes over two thousand equities and credits and outlooks
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(42:46):
all other good podcast providers, including the Bloomberg Terminal at
b pod Go. Give us a review, Tell your friends.
We'll email me directly at Jcromby eight at Bloomberg dot net.
I'm James Cromby. It's been a pleasure having you join
us again this week on the Credit Edge.
Hello, and welcome to The Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg,
and I'm Tim Rimington, a senior credit analyst covering basic
materials here at Bloomberg Intelligence. This week, we're very pleased
to welcome James Turner, who is co head of the
European Fundamental fixed income business at Blackrock. James, great to
have you with us.
Speaker 2 (00:37):
How are you very good? Thanks and that great deity.
Speaker 3 (00:40):
James has been with Blackrock for over seven years now,
starting out as the head of European Leverage Finance and
Portfolio Management, where he oversaw high yield long short credit
loans and clos all of which we hope to get
some insight into into today's discussion. Prior to black Rock,
James spent almost seventeen years at oak Tree, where he
was portfolio manager for European and Global high yield as
(01:02):
well as European loan and COLO strategies. I always like
it when our guests share my interest in high yield,
but James's background does one better as he also has
a degree in chemical engineering. But maybe we should leave
the discussion of the changing economics of industrial industrial molecular
chemistry until after we've finished taping.
Speaker 1 (01:20):
Indeed we will so just to get us started. Credit
markets are hot, with bond spreads at the titles in
twenty seven years, as demands soores and net new supply
remains thin. Elevated US political and macro risk has pushed
global credit investors into other regions, especially Europe, to diversify
their portfolios, but that brings its own challenges also political.
Just look at all the volatility recently in the UK,
(01:42):
Brands and Holland, plus there's the trade war to contend with,
and countries across the region are having to significantly boost
their spending on defense. At the same time, globally in
credit markets we are seeing more distress, defaults and bankruptcy,
but you wouldn't know it looking at the price. So
James break it down for us, how do you position
yourself given all the volatility, rising macro risk, turbulent geopolitics,
(02:05):
but also very tight credit spreads.
Speaker 2 (02:07):
Well, I think and all of those things you say
are completely right obviously, and it's a market where I
think what we need to look at is that's where
we sometimes take a step back and we need to
look through some of the noise, not be whips ORed
around by every headline that we see, because actually, ultimately
we're investing in fundamental credit and we're looking at the
companies on a corporate basis like that. But the market,
(02:29):
as you say, has also taken a very willingness to
look through the noise. At the moment, the insatial demand
for income has just kept technical is extremely strong from
that point of view, and having said that, there are
some signs or a little bit of stress in the market,
and certainly from the point of view of we want
(02:49):
to be able to be nimble really and when the
spreads go a little bit tighter, we might reduce risk
a little bit and then wait for the opportunity in
the spreads widen out a little bit. It's really taking
advantage of those dips still really very much by the
mentality in quality credit and making sure that we're looking
at the opportunities every time that happens, but not being
(03:12):
too scared to act when it happens, but not also
being too risk on the moment. Because as you say,
there is some stress in the market.
Speaker 3 (03:22):
So what are your dislikes and likes at the moment?
You know, when we're looking at sectors, asset classes, country exposure.
Speaker 2 (03:30):
Well, I think it's quite there's no sector that we
actually dismiss. I think there's always opportunities within every sector,
but there certainly sectors that are facing more challenges at
the moment. And you might say, you know, auto's I
think is one that's well trodden over as facing some stress,
and that's been facing some difficulties for a while because
of the transition from VICE to EV and that's only
(03:52):
made worse by some of the tariff announcements and also
some extent the import's coming in in the EUV market
as well, especially into Europe. Having said that, you know,
the majority of autos and auto suppliers are likely not
to default over time, so actually it does create opportunities,
but that it is obviously a sector that also has
its higher than are higher than fair share of defaults
(04:12):
and credit stress in it. So it's a matter of
really careful credit selection there. And really what we look for,
I suppose is companies that have almost the more premium
the better in many ways, because one of the things
we've noticed, especially with terrasts, are the more premium you are,
the better you are able to pass through your price increases,
and there's no you know, we can see that the
(04:32):
luxury car companies are better at doing that than say,
more commoditized car companies, all those competing in a very
evy heavy market. The other sector, and one you know,
but perhaps closer both of our hearts from history is chemicals,
which I think is actually a very challenged sector in Europe.
And I think that that's it's almost unique to Europe
(04:53):
a little bit how challenged it is because of the
feedstock costs that Europe experiences in terms of its reliance
on nap there is a raw material for its petrochemicals,
but also even just the gas prices being so high,
you know, three times the price of gas in the US,
and just from a feed stock perspective, that makes it
a very difficult market to be competitive in. So you
(05:15):
really have to be very high on the cost curve
to be internationally competitive. And that's combining a point as well,
where you're seeing increased supply across the world generally at
a time when demand is quite sluggage, so as that
there's operating rates for it becomes quite hard to make
good margins. At the other side, I think the other
sector that's perhaps almost a stealth sector, or perhaps almost
(05:39):
sometimes the most dangerous sector as well. It has some
opportunities that it's healthcare and often sort of a safe
or regarded as a safe sector, but actually it's almost
masquerading as a safe sector because actually sometimes when you
look deeper into it, some of the challenges from the
regulatory point of view, from a pricing point of view,
and the cost past three point of view are actually
really quite challenging for that sector. So again you have
(06:00):
be very careful in that segment as well, not that
there's not opportunities there, but it's just a sexor that
you need to be really quite careful.
Speaker 3 (06:08):
So keeping the focus on chemicals for a second, you know,
whereabouts in the credit spectrum do you see the most
sort of bang for your buck, you know, managing that
risk while still getting exposure to what may one day
be a potential recovery.
Speaker 2 (06:29):
I think what you look for is a position that
you have whereas cost advantage, where you're the lowest cost producer.
And it sounds obvious, but actually you need to look
into all the plants and understand exactly where they are
on the cost curve, and then maybe also the level
of specialty within the chemical company themselves. Clearly, the more
specialized you are, the less competition you potentially have and
(06:50):
the more bespoke your products are to enable you to
pass through increase price cost cost increases when and make
sure you get you keep your margins, and also you
are operating rates also potentially those companies with long term
contracts as well supply agreements that make sure that they
always are reducing at high operating rates because it is
(07:10):
really quiet and economies of scale business.
Speaker 3 (07:12):
As well, you and far between. Then, one of the
things we've heard from chemical CEOs this year is about
the fiscal simnius in Europe coming down the pipeline in
twenty twenty six. We've had ANXIS BSF others talking about
how that may bring a boost to chemicals demand and
(07:34):
also generally European industrials which have been sort of beaten
up a bit over the last years since the Russian
invasion of Ukraine. What are your thoughts on that we
haven't really seen any impact so far. Are you hopeful
that we'll see a change in twenty twenty six.
Speaker 2 (07:53):
I think we are, and that's our base case that
at some point in twenty six we will see demand
pick up across the industrial segments based on this infrastructure
spend and the boost from Germany, but it is going
to take a little bit of time to come through,
and I think in that intermediate time we're going to
see some companies struggle through that period. So again get
(08:15):
to your tour point, what do we look for in
a company as well? Is that every time really you
look at a chemical company, especially more quality cyclical type company,
you have to be sure that it can see through
a cycle, and so you need to look for the
appropriate leverage levels. You need to look to make sure
the cash flow is sufficient to get through a cycle
and its ability to potentially delay capex and enter that
(08:37):
point well invested, so it doesn't end up with operational
difficulties through that period.
Speaker 3 (08:45):
And more broadly, on the theme of the industrial recession
in Europe, do you think that the physical stimulus will
be enough to sort of to end it, to end
this sort of elongated recession we've seen in European and
or are the pressures facing it in do we actually
need more policy support to keep industry in Europe?
Speaker 2 (09:10):
Well, I think we're very hopeful that it will stimulate
the industry from that point of view, and I think
there's good reasons to think it will, and there are
other things that also need to be Infrastructure does need
to be improved generally in Europe. There's a lot of
investors lined up to make sure that that is the case.
So I think we're hopeful that that will happen. And actually,
(09:31):
I think when we look at estimates, we potentially think
that even people are a little bit conservative about how
much that that stimulus will actually improve the economies, particularly
in Germany. And then potentially, you know, if we're hopeful
as well, we may at some point see rebuilding in
Ukraine which might help as well. And we're hopeful that
that will help towards the latter half of twenty six.
(09:54):
But as I said, I think it's going to feel
like a long time until it actually starts feeding into
the industrial economy.
Speaker 1 (10:01):
I'd like to go back, jameson what you said at
the top of the call about being careful about your
credit selection, you know, not too risk on buying the
dips in quality credit and again being nimble. That's that's
what a lot of our guests would say. But at
the same time, you know, that's fairly easy for me
to say if I'm a smaller fund, you know, managing
a couple of one hundred million maybe, but a huge,
(10:22):
you know, elephant in the room, multi trillion dollar asset
manager like black Rock, how do you manage that? I mean,
how do you execute on that? But given you know
you're looking, you're being selected, but you have a lot
of money to put to work.
Speaker 2 (10:35):
Well, we have i would say market leading access from
a point of view in terms of number of traders
that we have, the access that we have to banks
with a very large counterparty of many of the institutions,
and we make sure that we get wall crossed on
a lot of deals as well, so that we have
(10:56):
access to think about the deals in advance, especially in
the primary market. And then also we have diversity across
our portfolios. We have some portfolios that maybe are a
little bit more buy and hold type portfolios, then we
have some more active portfolios, so we have a range
of portfolios. And also the other thing is that comes
down to it is actually at the moment, with the
(11:16):
technicals that we see in the market, it comes down
to again being good at that credit selection. Because if
you're early to spot problems or your early to spot
to advantages. Then actually usually the liquidity is there actually
for you. It's really when a situation becomes very stressed
that you find that the liquidity to drives up. So
actually it's a key skill being early to the party,
(11:36):
and that's why we invest a lot in credit research
as well.
Speaker 1 (11:40):
Do you see any signs, though more broadly, of miss
priced risk? Are there bubbles developing given the very very
strong technicals. I mean, there is so much more demand
than net new supply of the debt.
Speaker 2 (11:51):
That's true, and I think this comes from less insatiable
demand for income at the moment. If you look at
where you know that there is some stress in the
higher market, of some stress in the loan market. But
having said that, if you look across the piece and
you consider quite how fast interest rates rose, actually companies
(12:14):
did quite well through it. They're in a relatively good position.
The fact that the refinancing market, the tech market is
open and the technicals are so strong is to some
extent self reinforcing as well, because actually companies can refinance
it reasonable rates. Actually, to some extent, coupons are now
starting to at least decline in Europe now, so actually
(12:34):
refinancing is becoming easier for some companies as well, and
that helps their cash flow. So it is so actually
when we look at the spreads at the moment, we're
looking at them and we're thinking they are at the
tighter end. But having said that, there are good reasons
for them to be at the tighter end as well.
(12:56):
And well, and the other thing is when we look
at spreads as well, and with this as a well
trodden argument, but people are also looking at the yields
and it's a long time since we've seen yields as
good as this in the market in the past, and
it's pushing people, I think as well. The corporate credit
is looking extremely attractive compared to sometimes the sovereign credit
(13:20):
because actually you have a choice where you can find
your yield. You either go potentially for duration in the
longer dated sovereigns, or you take a little bit of
a shorter and the bellue of the curve for some
of the corporate credit. And the decision at the moment
seems to be go for the corporate credit for good reason,
because companies are in a good state and it's not
really the volatility isn't really coming from the corporate volatility
(13:41):
is often coming from the sovereigns, and so that's actually
why I think we're also seeing this strong demand. Then
there's other areas in our portfolios, and what we might
consider the ideal portfolio at the moment in fixed income
is in many ways we have a core allocation to
invest great corporate credit, but then we're also looking at
(14:02):
the plus sectors to supplement some of that yield and
some of that income as well. We may have a
portion in high yield, we may have a portion in
emerging market debt. And particularly something that's particularly good value
at the moment we feel is COLO tranches, And you
can really choose and pick your risk spectrum when you're
looking at COLO transers. You can go into triple A
(14:22):
and you're being well rewarded there, or if you've got
a little bit more risk tolerance, you can go down
into the double B or even potentially single B tranches
of clos and really you're getting a very good spread
and you'll pick up there. And that can you construct
a portfolio from that point of view in a risk
controlled way. It can be to whatever the clients or
underlying investors risk tolerance. Is it really produces a very good,
(14:49):
diverse portfolio where you're getting a nice yield and reasonable spreads.
Speaker 3 (14:55):
Just going back to the comment you're making about credit
markets being in a pretty good position, I just wanted
to get your thoughts on where you think default rates
are heading and your comments there about being nimble, you know,
do you see more of the stress situations as opportunities?
Are you able to get in ahead of enemies, you know,
(15:15):
join creditor groups.
Speaker 2 (15:18):
So I think we've seen slightly elevated default rates in
European high yield for example, recently, but having said that,
we've also seen extremely high recovery. So actually, when you
look at the loss rate, it's potentially not as high
as you might imagine. So the recovery rate, for example,
on the European high yield market has been around seventy
(15:40):
percent this year. Traditionally people modeling around a forty percent
recovery for the European high yield market. So despite the
fact the default rates have gone up, the loss rates
haven't actually increased as much as you might imagine. I
think we've seen a number And the other other thing
is what counts as a default is sometimes not even
(16:01):
a situation where you're actually ending up losing capital either,
which I think is also why the default rates have
been quite high. So if you had potentially just an extension,
it would still count as a default for the statistics,
but actually it doesn't if you don't really ever lose
any capital from that point of view, So to some extent,
I think the default rates are they're higher, but the
(16:22):
loss rate is not as high I think going forward,
and most of the defaults have worked their way through
the system, I think from here we'll see a decline
in the default rate in Europe. And the other thing
about it though, is also is that we've seen the
(16:43):
default rate rise a little bit, but we've also seen
that the spreads are already reflecting that in the names
that are likely to fault or unknown defaults in the future.
So actually the capital loss the defaults recognizing has already
been taken in the market. But it's also why we
see so much at the moment as well in the
spread of the market. So when you look at the
(17:04):
triple C segment, it actually is over a thousand spread
at the moment. It's extremely high, and that's really some
of the names that we know are going to fault
over the next few months already reflecting that in the price.
So a lot of any of the expectations we've already
seen in returns. But for the majority of companies as well,
(17:25):
you know, the market is wide open. There's no refinancing
risk on a company that is that is performing at
the moment. And that's again I think where the market
has changed a little bit over the last six months
is that in terms of how people are acting, no
one really has so much tolerance for companies that are
getting into a stress situation. So what you see is
(17:48):
you see people really coalescing around the middle, the high
single BEE categories, the low double B. There's a lot
of demand for that, not so much demand for triple
C at the moment, because as we know, we're in
a little bit of a trickier time at the moment,
and no one really wants to have to buy a
company which needs to grow into its balance sheet because
(18:10):
the growth is not sure that it's there.
Speaker 3 (18:14):
On the recovery's point, I mean, seventy versus forty percent,
that's a really big difference. What's driving that.
Speaker 2 (18:23):
I think it's because a lot of the defaults have
been situations where there's a secured element of the capital
structure and there's an unsecured element of the capital structure.
The secured element is much larger in comparison to the
unsecured in most cases, and the secured element is actually
recovered very well through potentially an lemy or a distressed exchange.
(18:45):
The subordinator is not recovered quite so well, but it's
a much smaller percentage of the capital structure. So actually,
if you looked at the dispersion, I think it would
actually be quite high, and there'd be a big, a
big divergence between if you're a secured creditor very high recovery,
unsecured credits are actually probably a very low recovery. But
(19:05):
that's really the market we're in at the moment. But
it's a positive development as well for how your market
because if you look back in history, secured bonds were
a relatively new thing after the Financial crisis. That were
very few before the financial crisis. So when you look
at the recovery rate now, it's gradually, I think been
increasing a little bit as you see more secured bonds
(19:25):
in the higher your market.
Speaker 1 (19:27):
Sounds like you're also avoiding triple cs, which you know
they have performed well. Spreads have remained slightly wide to
the rest of the market, indicating the risk, but they've
done you know, so by avoiding them, you're you're going
to sacrifice return potentially. Do you worry about underperforming if
you if you miss out on triple c's.
Speaker 2 (19:45):
I don't think it's a question that actually it's not
a really a question of necessarily just avoiding them. Were
still selectively by them. But I think actually the bar
is a little bit higher at the moment. In the past,
when you could see obvious growth and you could see
easy cash flow generation and very low financing rates, it
was easier to understand that a business could grow into
(20:08):
its capital structure a little bit more, which is typically
what many triple seeds need to do. And I think
the bar is just now a little bit higher to
do that. But selectively we do so are quite see opportunities,
and we certainly do buy triple seeds.
Speaker 3 (20:23):
And on the point is, you know we've seen quite
a few in recent years. Do you think this trend
is going to continue? I mean, market environment relatively benign.
Is this the time that sponsors come and you know,
sort of kick the can down the road a bit more.
Speaker 2 (20:39):
Yeah, and kicking the can down the road has a
negative connotation in some ways, but actually for cycical businesses
that can work quite well sometimes, and there's clearly a
temptation to do it if you can see an opportunity
to create value sometimes. I think the difficulty I mean,
I think we'll see more of them in Europe. Having
(21:00):
said that, it's harder to execute an lemy in Europe,
and there are some more obstacles to it in Europe
than there are in the US. So I'm sure where
the US has gone to some extent, Europe will follow,
but I don't think in quite the same volume, because
there are jurisdictional issues and even the legal framework is
a little bit harder to navigate anywhere in Europe from
that point of view.
Speaker 1 (21:21):
And how do you protect yourself against the threat of
being subordinated. I mean, you're obviously the biggest and one
of the biggest funds out there, so is that just
just a scale issue.
Speaker 2 (21:33):
I mean, when we get into a restructuring, we'll obviously
want to take an active part in it if we
have reasonable position and clearly act in our best interest
from that point of view. But I think the biggest
way to protect really against it is making those good
credit calls in the first place and not really getting
into a situation where you're going likely to be entering
into a LEM. I think one of the things that
(21:55):
we're also would be very wary of is entering into
an LEM as a secured creditor. Has been a very
difficult position to be in. I think if we were
in an LEM, or we're at risk of going to LM,
we're to be in the secure position.
Speaker 1 (22:12):
Can you talk a bit about the defense spend over
in Europe. We've heard people on the private side get
quite interested in the potential for investing there. You know,
it's obviously going to require a lot of spending by
governments and defense companies and everything else, But what's the
what's the credit investment angle for you?
Speaker 2 (22:33):
It's a sector that's clearly going to benefit from increased
spending across Europe. I think it's well, you know, well
well trodden route. Now, there are clearly some ESG requirements
that we have to meet on defense companies, and again
they're well known in terms of controversial weapons and certain
guidelines that we receive from investors, but also it's away
(22:57):
from just the defense as well. I think it's trying
to take advantage of all of the infrastructure spend that
we talked about as well, so that there are many
industries I think going to benefit from that. We just
have to make sure that we time it right and
we look at it carefully, and we look at those
that would really likely to benefit for example. I mean,
again it's a very big sector and there are some
(23:18):
going to be some winners and losers. But within the
utilities sector, for example, I think everything to do with
the AI build up is going to require more infrastructure
spend from that point of view, you know, as simple
as things. Looking at companies that produce copper cables for example,
are likely to be beneficiaries of that. So we're looking
for the maybe the second order companies as well that
(23:41):
are going to benefit from some of that infrastructure spend
and some of that defense spend.
Speaker 3 (23:46):
You mentioned ESG there being a concern when it comes
to defense. Do you find en investors are getting a
bit more lenient on defense as part of a sort
of an ESG screen or blacklist since the since the
Russian invasion of Ukraine.
Speaker 2 (24:03):
Well, I think there are some things that always going
to be hard lines. But having said that, you have
to also weigh up the country's ability to defend itself.
And perhaps there has been some softening of amongst some
constituents of the of the lines, but there's always going
to be some hard lines on the controversial weapons and
I think that those will continue to be There.
Speaker 1 (24:27):
Is the investment opportunity more on the public side, do
you think, or was it direct lending private? How do
you kind of break that down?
Speaker 2 (24:34):
I think it's all of the above. There's now I
suppose with the advent of direct lending, there's really now
a third option for particularly for things like LBOs as well.
But actually increasingly larger public companies are also looking in
even investment rate of looking for the direct lending market
every scene as well. The biggest beneficiary in many ways
is actually the LBO or the sponsor or the company,
(24:55):
because they actually have now a third reasonable and sizable
source of financing. And I think companies when they look
at their options will depending on the speed of execution
they need, or whether pricing is more important, or whether
such size or scale is more important, they'll look at
all the markets, and they'll probably weigh out their options.
If they're luckily enough to be able to take advantage
(25:17):
of all three of them, then I'm sure they will.
And we've seen different periods where direct lending has come
to the foe. Perhaps in twenty twenty two, when there
was the spreads were wider in the high yield and
loan markets and there was more certainty of execution by
going to the direct blending market, and then a spread
of titans. We've seen some of those deals then refinance
out into public markets again. I mean, arguably you could
(25:39):
say in twenty twenty two and this was a maybe
not an exceptional time, but it's not the norm. Is
that actually there probably was, Actually it was more expensive
to come to public markets at that time than it
was to come to the private markets at that time.
That's obviously since reverse somewhat as well. But I think
we see a lot of capital looking at you know,
(26:01):
not so many deals at the movement. So clearly there's
a lot of competition for those deals.
Speaker 1 (26:06):
What about the relative value though for you as an investor.
We talked to some private credit firms. I mean, our
last guest from Blacksone was talking about a two hundred
basis point pickup to liquid credit on both high yield
and investment grades. So you know, that's that's pretty substantial
given how tight everything else is. I mean, does it
not make sense to you to I mean, you have
a lot of potentially locked up capital, it's less volatile,
(26:29):
you get a lot more return. Why not why not
go private?
Speaker 2 (26:33):
I think when you look into it, and clearly Black
Book has the ability to, especially with the recent acquisition,
has the ability to go private and have private debt
capability or materially larger private debt capability now as well.
So we can look at all markets and I think
that that's really what we want to be able to do,
is we want to provide capital two companies wherever they
(26:56):
might want it, whether it's in the public markets or
the private markets. Again, but it's very nature. Seeing how
the two hundred basis points pick up is derived is
not necessarily clear just because of the nature of the
private markets, we don't see exactly exactly that pickup. But
I think also we need to distinguish a little bit
between the risk and where we sit on the risk
(27:18):
spectrum as well, because if you compare I don't think
comparing the European high old market to a lot of
sponsor direct lending deals is exactly comparable, only because when
you look at the high old market, it's seventy percent
double B. This is talking about the European HIGHERD markets.
It's seventy percent double B. I don't think, and obviously
they're not rated, but I don't think most of the
direct lending deals would fall into the double B category.
(27:41):
They're more akin probably to the leverage loan syndicated loan
market in the single BEE category, as like sponsor deals.
So again comparing you need to make sure you're comparing
apples with apples. But I think the one thing we
want to be able to do is provide capital wherever
it's needed and in whatever form it's needed. And I've
no doubt in the future these three markets will coexist
(28:04):
as they do at the moment quite comfortably.
Speaker 3 (28:08):
So you know, we've got this relatively benign and market environment,
and companies have new ways of financing themselves, you know,
often with the well spreads have come done quite a
bit this year. Do you see this, you know, as
the makings of a new wave of M and A
or LBOs coming to Europe and when do you think
we could see a pickup on that side.
Speaker 2 (28:32):
Well, we hope, we hope to see a pick up
by now already, I think, but it's been a little
bit delayed, and I suspect it's going to be a
little bit delayed a little bit longer because really, when
I think when we talk to banks about their pipeline,
we talk about, particularly the M and A pipeline, I
think most deals take around, you know, at least minimum
(28:52):
three months, but more likely six months to materialize, and
I think we're still going to be seeing that the
pipeline is a little bit bear for the rest of
the year, which I think provide a very supportive backdrop
or spreads. Still, I think we're still going to see
these strong technicals and the market's ability. We're going to
see volatility, no doubt in terms of the headline news,
(29:13):
and we've just seen a little bit of about it
with the French elections, but the market seems to be
able to shrug it off quite easily, and I think
that will continue while this technical demands taste strong and
we don't have enough supply in the market, and I
don't think we can really, although we're seeing some I
think we are seeing some green shoots of recovery in
(29:34):
M and A, but I think that's mostly in the
corporate area as opposed to the LBO area. But I
also think that there are private equity companies that are
more keen now to make sure they are making some
exits because I think exits have been a difficult thing
and they need to return some capital to investors now.
So I think there is some pressure building from that
(29:54):
point of view, but I'm sure again they'll be doing
it at the right valuations when they when they when
they see fit. But I don't think the pipeline is
strong for the rest of the year, and so I
don't see you or see a huge pickup.
Speaker 1 (30:09):
Give the new deal given those strong technicals. How tight
could spreads go?
Speaker 2 (30:13):
James, Well, we're if you depending on metrics, at the moment,
we're really quite close to all time tights. It is
certainly post financial crisis. We're not actually especially like for like,
if you look credit rating adjusted, we're actually not at
the tights of the European market, at least compared to
(30:34):
two thousand and seven when it reached its tightest I'm
not saying we'll necessarily get there, but I think it
would be. I think where we are now is we're
effectively range bound. It doesn't mean we can't go a
little bit tighter from here, But then I don't see
us going, you know, much more than maybe ten or
twenty basis points tighter from here. I mean, that'd still be,
(30:57):
you know, a relatively material move in this market. And
then I suspect would see, you know, if we see
a wave of supplies we did in June, we'll see
the market going a little bit wider. Again, it's a
very strong market.
Speaker 1 (31:08):
At the moment, But is there a relative value Europe
versus US still? I mean, it sounds like it based
on some of the stuff you're saying, particularly on recoveries
which are much lower in the US.
Speaker 2 (31:20):
They're much lower in the US, but the default rate
is actually lower in the US at the moment as well.
So I think at the moment, we really see this
a game or a question of really just making the
right credit selection. I don't think there's a clear advantage
of one market over the other at the moment. I
think what we we see if you but having said that,
(31:43):
you were to look at the technicals, I think they
slightly favor at the moment the European markets. And there's
a reason why I say that is actually, although I
don't think we've seen anywhere near this whole scale reallocation
away from the US market that perhaps people we're talking
about in April or May, I think, on the margins,
we have seen people quite keen to diversify a little
(32:06):
bit and I think Europe has been a beneficiary of that,
and I think other markets, such as say emerging market
debt or something like that, has also been a beneficiary
of that as well, as people just look to diversify
risk a little bit away from the US. But again,
the majority of assets will still be in the US.
(32:26):
It's on the margin. And we've not only seen that,
I think from European investors going back to home, I guess,
but also I think we've seen it from investors who
are traditionally very US centric investors, say for example in
the Middle East or perhaps in Asia. They've also, on
the margin, have slightly reduced their exposure to the US
and that's really been to the benefit of Europe. And
(32:49):
when you've seen even a small allocation away from the US,
because the European markets are that much smaller. It actually
makes quite a lot of difference to the European market.
Speaker 1 (32:57):
That the spread's going further lower. And also, you know
there is easing going on around the world. You mentioned
earlier a nice yield when if you've got to put
a number on that, but also, I mean, how much
of that nice yield remains in those tightening and easing dynamics.
Speaker 2 (33:14):
People have been quite happy to have they've been sitting
in cash and cash reserves or cash accounts, and cash
deposits have really been quite high across Europe, and I
think what we're increasingly seeing is people looking at alternative
ways to get income, and I think that's going to
continue driving the markets. And nowhere is that more evident
(33:34):
than we've seen in things like fixed maturity products, where
people have been transferring from their cash deposits into either
investment grade corporate bonds or high year corporate bonds to
supplement that income. That has been reducing this interest rates.
(33:55):
So the answer is, I think yield from that point
of view, is still attractive to people because it's where
and it's still very attractive compared to history as well.
I mean, if you look over the last ten or
fifteen years, really we haven't seen these yields at all
during this period. So and I think memories, you know,
going back to when interest rates were much higher, you know,
(34:17):
many decades ago, have faded and actually people still regard
these yields as attractive and places they want to put
their cash. And also it goes I mean, just as
another I think that the FMP market is really also
helping in some ways to stabilize and you know, people
in regard it as a good thing or a bad thing,
(34:37):
but actually once the money goes into these F and
P funds that have maturities of say three or four years,
it's almost locked up, and it's providing to some extensibility
to both the investment rate and the high yield markets,
especially in these shorter data points. And again it was
very evident during April selloff, when we had Liberation Day,
(35:00):
that we saw that there was very very impact. There
were still buyers of all of these short dated bonds,
and we believe that a lot of that demand is
from fixed maturity products and we've seen that demand continue
and it provides a real stability and anchoring to that
short end of the market.
Speaker 1 (35:17):
Sorry, fixed maturity products the FMP you were talking about.
That's something you you have in Europe that we don't
have here. So I'm just wondering could you just expand
a little bit on what they are.
Speaker 2 (35:26):
Yeah, sure, it's they have a maturity data effectively, so
it's usually between three and four years, and so people
will transfer there into one of these funds and it
will have a yield headline yield that you get at
the beginning of when you invest in the money, and
then in three or four years that year should have
(35:48):
materialized and you can get your money back and you
will have got whether it's four or five six percent yield,
whatever your risk tolerance was when you went into there.
And these are very attractive products to much of the
retail market across Europe.
Speaker 1 (36:05):
And they are significantly active in the corporate debt market
to the extent that they're actually affecting risk pricing or
demand or how what's the bigger impact.
Speaker 2 (36:16):
I would say both. I mean anything that you can
you can often even see that where a bond has
a three and a half or four year maturity, as
soon as it falls into the range of the majority
of fmps, it's spread my attactically tighten. It's your go
down because the demand for the is so significant. I
(36:36):
mean there are billions, there is billions of euros that
has flowed into these products over the last six months.
Speaker 1 (36:43):
I want to ask you, James about ESG because you
brought it up earlier and it is something that is
on our mind. This week Climate Week in New York,
Black Rot was though among a group of money managers
to have lost credit mandates from one of Europe's largest
pension funds, and there was a, you know, an e
SG element to that. I know it's it's a quite
a controversial matter in the US and it's more embraced
(37:05):
in Europe. But what's your view generally on ESG investing
when it comes to credit.
Speaker 2 (37:12):
I think the thing about ESG is it's actually part
of our risk control anyway, It's always been part of
our process if you think about the elements that lead
to a good credit selection. And this is before this
is not specific ESG funds. This is just consideration of
(37:33):
the risk factors that affect a company. And if you
consider there that you know, the the environmental impact that
a company has in terms of it's if it gets
into issues, for example, it's pollution or something like that.
(37:55):
Then actually you always need to consider that because it's
part of the investment that a company needs to make
to make sure that it's actually complying with rules. So
I think from that point of view we've always looked
at it. You don't want companies to end up with
liabilities because they're obviously going to be credit negative, So
from that point of view, we've always looked at it.
(38:15):
I think in terms of social branding and how important
it is to make sure that you're best in class
from that point of view, in terms of how you
treat your employees or anything like that. Then actually, I
think we have always looked into that as well, because
it can again affect the value and the risk of
a company from that point of view. And again governance,
(38:36):
I mean goes without saying. You really want strong governance
within a company to make sure it's well run, well controlled.
One of the biggest reasons for loss, I would say
amongst companies over the history that I've been looking at
these credit markets is often because of poor governance, because
of irregularities that occur. So any company that has good
governance is obviously going to or not obviously, but is
(38:58):
usually a good credit its investment as well. So I
don't think it's a new thing that we've looked at
from that point of view. It's always something that goes
to the risk of a company, something that has always
been part of our credit process.
Speaker 1 (39:14):
So in terms of everything you're looking at right now, Jane,
what's the what's the big opportunity, where's the best relative
value let's say for the next six to twelve months
in your you know, in your view.
Speaker 2 (39:25):
So I think when you look at relative value, as
long as I think I mentioned them earlier, actually, I
think the probably COLO tranchers are probably one of the
best relative value picked within the credit markets at the moment.
And the beauty of them as well as that you
can pick your risk tolerance as well. You can go
from Triple A all the way down potentially to Colo
equity as well if you want, and you can get
(39:46):
the potential return that you want. And on almost every
chrance you look at in terms of it spread, it
looked well remunerated. So particularly you know, you look at
Triple A's you're coming at one twenty five, one thirty,
they look extremely attractive. From that point of view similarly
to the investment grade tranches as well, and if your
(40:08):
tolerance is higher than you know, equity in the low
to mid teams is also a pretty attractive investment as well.
And I think that much of the would i say,
sort of stigma of clos that perhaps existed post financial
crisises or less past now and we've seen that CLO
two point nor it is really a very good structure
(40:29):
and something where really the chance of credit loss, especially
in these higher rated transes, is very very low.
Speaker 1 (40:36):
But given all that we're discussing about the stresses in
the leverage finance market, you know there's there's loans. You
know that there aren't that many of them, there's a
lot of demand for them that the pricing just gets squeezed,
they get refinanced all the time that the arbitrage for
clos is being diminished. You're not worry generally about sort
of risk brewing technical risk in the clos given how
tight the market is for leverage loans.
Speaker 2 (41:00):
I mean, clearly there's a there's an element as well
which you need to pick the right managers because the
loans that get selected to be in the closlore on
the credit skill of those managers, and the managers that
avoid the problems and the more avoid the defaults will
I think will have very good performing clos and we're
very comfortable with that from that point of view. But clearly,
(41:22):
when we're buying clo trans is one of the things
that we are looking at is the style and quality
of the manager and their history of credit selections, their team,
all the things that you look at to make sure
that you're selecting managers where you think that their chances
of credit loss within their portfolios are minimal. And of
course there's you know that these clos are based on
(41:43):
really a very diverse portfolio, and you know it's one
of the criteria that clos are judged on is the
diversity of the underlying holders.
Speaker 1 (41:51):
And you're buying European clos from Triple aid all the
way down to the extity trund.
Speaker 2 (41:56):
Yes, yes, or we have the we have funds and
ability to do that.
Speaker 1 (42:01):
Would they also buy private credit helos.
Speaker 2 (42:05):
That's not something that fits within the mandates of those
But if we had a mandate that was able to
put these end then I'm sure we'd look at those
as well.
Speaker 1 (42:13):
Great stuff. James Turner from black Rock. It's been a
pleasure having you on the Credit Edge. Many thanks, no,
thank you very much. And to Tim Riminton with Bloomberg Intelligence,
thank you so much for joining us today.
Speaker 3 (42:23):
Thank you for having me James.
Speaker 1 (42:25):
Even more analysis read all of Tim's great work on
the Bloomberg Terminal. Bloomberg Intelligence as part of our Search
department with five hundred analysts and strategists working across all markets.
Coverage includes over two thousand equities and credits and outlooks
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(42:46):
all other good podcast providers, including the Bloomberg Terminal at
b pod Go. Give us a review, Tell your friends.
We'll email me directly at Jcromby eight at Bloomberg dot net.
I'm James Cromby. It's been a pleasure having you join
us again this week on the Credit Edge.
Host
James Crombie
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I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.